Tuesday, July 8, 2008

Labeling, such as equities are now in a bear market, seems to have taken on a meaning that transcends reasoning and analysis and has settled into the domain of dogma. In other words, is there any real, analytical significance to the fact that certain indices have declined to such a point that they have produced a decline of 20% or more?

To some, the bear market bell has rung and, therefore, stocks are now banished to a land of expanding declines to all segments and sectors, as evidenced by last week’s thrashing of the leadership issues. Stocks destined for more losses is the given. But is it so that because some arbitrary line in the sand (down 20%) has been breached further and more extensive declines are a fait accompli?

Moreover, is it a done deal that equities are headed for sustained bad times when other important indices, such as the Dow Transports or the S&P 400 Mid Cap have declined to a meaningfully lesser degree?

To be sure, there are those who would argue that the all-knowing market has a "wisdom" that mere mortal investors would be reckless to challenge. Yet, here too, dogma supplants analysis and reasoning. For example, as noted in previous reports and blog postings, the current equity market climate is dominated by the shorter-term players (hedgies), whose time horizon ranges between milliseconds and weeks. Therefore, can it be assumed that the "wisdom" of the market resides with those whose interests are less oriented toward fair value analysis and more oriented toward what will produce the best short term results?

Investment Strategy Implications

There appears to be two ways to interpret current equity market sentiment. One is to say that stocks have crossed a line that now dooms future market action to much lower levels, with a broadening out of the pain to all sectors, styles, and regions. No place to hide. The current decline is the second leg of the bear and any near term rallies should be treated as selling opportunities.

The real economy underpinnings to this conclusion are numerous, everything from stagflation to $1.6 trillion in bank losses to $200 a barrel for oil and a global recession. Of course, such serious economic problems assume a static rather than dynamic environment. A cause and effect that lacks responses and their feedback effects that could alter the pre-destined outcome.

There is a real danger in buying into the dogma of benchmarks. As someone who believes more economic and investment pain lies ahead, it is hard to agree, however, with the thinking that it will all come to pass now that we have passed some magical, yet dreadful, line. Therefore, an alternate conclusion might be that the aforementioned real economy horrors will be forestalled for a variety of reasons, such as the $1.6 trillion bank losses is shrunk thanks to intellectual sanity rebuffing FAS 157 and the fair value doctrine. Or that $200 oil does not occur as the demand destruction that $140 oil produces caps further rises. Or perhaps oil declines to $100 as regulatory and legislative action force full disclosure of ownership interests in commodities (see yesterday's WSJ online article re pressure on the CFTC).

Timing is everything, it is said. And the timing of a large drop in equities seems more appropriate for a later date, more like the first half of 2009.

bio

President and Global Investment Strategist with Blue Marble Research and author of "Sectors and Styles" (Wiley 2006). Vinny is a leading investment strategist and asset manager. He appears regularly in the financial media (Bloomberg TV & Radio, Financial Times, Wall Street Journal, CNBC, Yahoo Finance, foxbusiness.com, BNN TV, New Delhi TV, CCTV - America, Barrons, Reuters) and is a frequent guest speaker at various major investment forums. Vinny also produces and conducts timely topical and educational programs with various CFA Societies and other groups, including the highly acclaimed "Market Forecast Series". Vinny is a past president of the New York Society of Security Analysts, a managing member of Adriatic Capital Partners, and a Nonresident Senior Fellow at the Information Technology and Innovation Foundation. Vinny attended The Juilliard School and New York University and earned his CFA charter in 1986.

Morning Call May 2007

Morning Call April 2007

CNBC "Kudlow & Co". March 2007

Morning Call March 2007

Kudlow & Co. February 2007

McDonald, Catalano, Luskin, and Burnett

Kudlow & Co. February 2007

Laffer, Catalano, and Froehlich

Kudlow & Co. January 2007

Malpass, Abrams, and Catalano

Disclaimer

The information found on this blog and in published reports. was prepared from data we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Such information and any views or opinions expressed herein are not to be considered as an offer to sell or a solicitation of an offer to buy securities of the sectors or styles covered on this blog and in published reports. Opinions expressed are subject to change without notice. Past results are no indication of future results.

Full disclosure: While neither Vincent Catalano nor any member of his family hold positions listed on this blog and in published reports, accounts managed by Blue Marble Research may hold such positions.

Some of the sectors, styles, regions, and countries mentioned are the recipients of trends and themes that might vary from those noted on this blog and in published reports.

Vincent Catalano certifies that all of the views expressed on this blog and in published reports accurately reflect his personal views regarding any and all of the subject securities or issuers.